National Defence Committee on April 29th, 2010

[Ray Boughen, Conservative, Palliser, SK]

That's why it wasn't there.

[Timothy Page]

You read it well.

What we did see is that Canada traditionally flies, drives, and sails its military equipment longer and harder than almost anybody else. That's why, in our report, we emphasize the importance of a viable in-service support capability in this country. Over time, industry has become the true steward of military equipment, long after the DND or Public Works official has defined the requirement, engaged in the competitive process, and signed a contract. Industry is there repairing, maintaining, and upgrading the kit through a much longer life cycle than would otherwise have been required.

Secondly, given the pace of technological change, there are many generations of technology insertion that go into a modern piece of kit, again, driven by the industrial sector of the country. So industry, in our view, is more than just a supplier through a Walmart-like environment of widgets. It's a direct operator of military equipment. There's the UAV system in Afghanistan right now, flight training in Canada, and base logistics in Afghanistan and elsewhere, where the private sector is running that business. We're suppliers, we're operators, and we're also stewards of the military equipment over that extended period of time. That's why we think it important for there to be an industrial strategy that considers not just the acquisition phase of major capital programs, but the entire life cycle of it. But we didn't talk about the decommission phase.

[Ray Boughen, Conservative, Palliser, SK]

Thank you, Chair.

[The Chair, Conservative, Maxime Bernier]

Thank you.

Now we'll give the floor to Mr. Wilfert.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Thank you, Mr. Chairman.

The Paul Martin government allocated $15 billion to the military in the 2005 budget to start rebuilding the forces. The Harper government has announced moneys. Now we're in a situation where money is becoming increasingly tight.

How realistic do you see this? Given the current economic climate and given the $56-billion-plus deficit that we're in, are you really going to see, at least in the foreseeable future, much of this Canada First defence strategy by the government coming to fruition, given the fact that all these announcements are made but there's no delivery because, really, there isn't any money?

[David Stapley]

Obviously, this is something that we discuss at great length in the boardrooms, not just in terms of the Canadian market, but those of us who are exporters also look at similar settings in the U.S., the U.K., and elsewhere. At the end of the day, we have to make a judgment because we have to place bets to employ our people and continue on with our research and development and so on.

I'm not avoiding the question; what I'm really getting to is we discount. So we look at all the potential markets at our disposal, all the programs where we have a legitimate potential position to play in Canada, across the spectrum of what our colleagues in the defence department need over time, and then we discount for the very reason you talk about, because we do see close in the impact of exchange rates, the budgetary challenges, the economic challenges. So we don't overbet and then end up having a significant restructuring.

By the way, there is some significant restructuring going on in the Canadian defence industry right now, notwithstanding the very generous programs that the government rolled out over the last couple of years.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

I ask that in the context that companies I talk to--as you, Mr. Chairman--then go on to say, “Well, the procurement process has all these legal constraints and certain parameters that we understand, but there tends to be much more emphasis on that than there is on the success of executing the program itself”. That's something that many of your members seem to say: “This is why our costs go up. Initially, we budget for x, but then there are these delays, and then it obviously costs y. And even if we factor in what we perceive it may be, it doesn't happen.” I guess this is part and parcel of why you've talked about the streamlining of the process. But this seems to be the frustration that I continually hear from some of your members.

[David Stapley]

It's true; and again, it's not unique to Canada.

In the simplest of forms, time is money. Not every company has a bankroll sitting there to invest. There is a cost of money, the same as there would be if we went to mortgage our house. If you have a cost of money extended over a long period of time, you very quickly erode your potential profit. So you start off in the hole, and it doesn't get any better.

If you keep that in the back of your mind, when we look at value-added versus non-value-added of a process--a procurement process in this discussion--no one in industry or the government would ever want to throw out a piece of process that delivers value.

We get to see, from our perspective, the commercial process versus the government process. We could be building the same satellite for a different customer, the same risk parameters, technical risks, financial risks, performance risks, and so on, and yet the process costs of doing that in the commercial world will be considerably less than the process costs of doing it in the government world. That's what you keep hearing. We have this experience in the private sector, where we deal among ourselves all the time, so the process is much more efficient.

Now, what we don't have, in fairness to the government, is the accountability to the voting public. What's the price? What's the delta?

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Yes, you want to get that balance.

If you were a hockey coach, you wouldn't put a team on the ice constantly one man short, I'm assuming.

[David Stapley]

I'd try not to.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

You would play with a full complement.

[Timothy Page]

It depends on how many the other team had on the ice at the same time.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Well, if they have six on the ice, presumably you would want to do the same, unless you have a penalty. But the penalty you seem to have is that we seem to penalize ourselves in terms of the procurement process, with all these delays, these non-value-added costs, etc.

Are you able to quantify the impact of that on your industry, in terms of what it does to the process?

[Timothy Page]

The delayed program today is resulting in companies laying people off at a time when the government is investing in stimulus programs to create jobs in Canada, at a time when the government has committed an awful lot of money over the next 20 years to rebuild the military. We believe, and this is the thesis of our report, that there's a win-win opportunity for Canada to not only re-equip the military but do so in a way that builds both capability and capacity, sustainable capability in this country.

Countries the world over see their defence industrial sector as an engine for innovation, an engine for technology, technological growth. We have a huge opportunity, through the Canada First defence strategy, to take a page out of the book of our competitors and achieve that same win-win situation for Canada. It will be good for the Canadian economy, it will be good for Canada's security, and it will be good for knowledge-based workers across the country.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Thank you. You obviously make a good coach, because you realize that if the other team has their full strength then you should too. Good.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Now I will give the floor to Mr. Payne.

[LaVar Payne, Conservative, Medicine Hat, AB]

Thank you, Mr. Chair.

Welcome to the witnesses.

I want to follow up on a few things some of our colleagues have talked about in terms of a defence strategy. Mr. Stapley, you did talk about the situation in terms of governments and recessions and so on. Your process was to look back and analyze these things and try to figure out which way it's going. Is that the standard process you would see for whatever government is in power?

[David Stapley]

I think so.

[LaVar Payne, Conservative, Medicine Hat, AB]

Thank you for that.

Some of my other colleagues have talked about the industrial strategy, and I see that as having some benefits. Obviously, I have some concerns around that whole thing in terms of whether in fact we would get the competition we need.

We talk about building ships. Potentially, if you look at all aspects of the requirements of the Canadian Forces, whether it be tanks, trucks, or airplanes, you could have, obviously, the high-tech weapons software, etc. Are you considering this to be all within Canada? How would we be looking at competition otherwise? If we get one source, I can see slowdowns in production, I can see huge costs. Maybe you could help me out with that.

[David Stapley]

I'll start and then Tim can jump in.

Nowhere have we advocated that we'd try to be everything our domestic customer needs. We don't build fighter airplanes in this country, for example; nor should we. In my view, we can't afford it. With the exception of the land vehicle capability in London, we don't build tanks. We do build ships, or we have built ships. So we need to look at what's practical, what's reasonable, and what's sustainable.

The rest of it is back to the financial model and the business model, which includes a very important element, and that is competition. How do you get the best value? You can compete in a dozen different ways. You can compete at the technology end, open it up, best team wins. You can compete at the production end. You can compete almost anywhere in between.

You also can compete at almost every level in the supply chain, and the prime contractors do. I happen to work for a mid-tier defence company, so we compete every day for business with our global peers. There's lots of room for competition. The prime contractor could have been selected. His obligation to his customer is maximized competition at every level in the supply chain, however you define competition. So there are ways of doing it, and it needs to be looked at depending on what the product is or the output is. A ship is different from an IBM computer, to use that example.

Again, it is not rocket science, but it needs to be looked at with the best value in mind. I'm not suggesting for a moment that we throw out competition, but at the same time let's not throw the investment down the tubes, if it makes sense to benefit from it.

[Timothy Page]

The issue we were trying to get at in part in the report was the relationship between the government and industry as it relates to our defence environment and around the world. There seems to be a much tighter working relationship between national governments and their national defence industrial base in pursuit of defined military and economic objectives than there would appear to be in Canada.

Our argument is that we're playing in the global market, and we can't go into that global market and be successful if we have one arm tied behind our back. So to the extent that the Canadian government identifies key capabilities, key industrial capabilities, and wants to ensure that it has access to those capabilities from onshore suppliers in a competitive process, there needs to be that building of trust and that building of responsibility and respect between the parties that we don't currently see existing. Our report tried to make that point, that there's a real opportunity here for a new relationship between business and industry, one that results in a win-win environment whereby Canadian workers are able to do value-added work in support of the Canadian Forces mission and in support of the federal government's economic objectives.

[LaVar Payne, Conservative, Medicine Hat, AB]

There was something else you talked about earlier with HRSDC, in terms of R and D and working with other military-type situations. We have an organization in Medicine Hat, Meggitt Defense Systems, and they have been working hand in glove with those folks, and you talked about the complications in terms of conflict. So there has to be a way forward on that, because I've heard there are issues in terms of Meggitt trying to sell equipment to the government, yet they can sell it right around the world.

[The Chair, Conservative, Maxime Bernier]

Shortly.

[Timothy Page]

Yes, we heard that. Canada as a first customer is an extremely important asset. When we go abroad and are asked by a foreign buyer why we're not able to sell to our own government, how do we expect them to buy from us?

Meggitt, incidentally, is very interested in the unmanned aerial vehicle business, the UAV, which not only has a military application but also a commercial application: pipeline surveillance, northern surveillance.... So to the extent that the government is identifying capability that serves those combined interests, that adds value to the economy and adds value to our security

. Thank you.

[The Chair, Conservative, Maxime Bernier]

Thank you.

Now we give the floor to Ms. Gallant.